Business Review

Nasstar provides desktop computing over the internet enabling users to do all their computing in the internet cloud including access to their desktop, files and applications such as email and Microsoft Office Professional - through a web browser. This means all your computing is done via the internet rather than on a locally installed computer. This model of delivering computing via the internet rather than from a local PC is known as 'cloud computing' or 'Software as a Service'.

Nasstar's philosophy for future growth has emerged with force during the period. The philosophy is to keep it simple and scalable, just do one thing - cloud computing - and focus on doing it better than anyone else.

Cloud computing takes shape
This year has seen an important change in our sales strategy as we shifted focus to Nasstar Hosted Desktop at a time when it wasn't clear how ready the market was for the product. The first version of Nasstar Hosted Desktop was launched in 2004 but required dedicated hardware for each new customer. As a result it was not scalable. In light of our view that Nasstar Hosted Desktop could be a mass market product we continued to invest time, staff and hardware in devising a scalable solution. The result was a 'multi-tenanted' system whereby the Nasstar Hosted Desktop platform was built as a single system which scaled easily as new customers were added to the platform. The first version of the multi-tenanted platform was released in late 2006 and further development continued in 2007 to refine the product. By December 2007 we were confident that Nasstar Hosted Desktop was ready for a proper marketing push. A new web site was developed and launched in March 2008 with a bullish PR campaign "the end of the IT department" to communicate that desktop computing was now a simple internet subscription service and didn't require a traditional on-premise IT support department.

There is compelling logic for buying Nasstar Hosted Desktop. Starting from the proposition that most businesses need core desktop computing then the only issue is how best to deliver that need. Put simply desktop computing can be delivered two ways: on-premise or over the internet. The latter delivers these services in the internet cloud - 'cloud computing' - and this is Nasstar's model. When one considers the benefits of the hosted desktop model compared to the traditional on-premise model then the hosted version wins on benefits. The key benefits of Nasstar Hosted Desktop are described below.

Value. Nasstar Hosted Desktop is a 'pay as you go' model for IT rather than a capital expenditure model. This means companies do not have to invest cash in their own servers and software licenses but instead can pay monthly for what they use. Not only does this approach save capital expenditure but it also ensures IT costs are predictable and transparent. In the current economic climate this is a far more attractive approach than the traditional capital expenditure model.

Security. Nasstar Hosted Desktop means that a company's data is stored in a secure data centre rather than on local PCs and laptops. There have been many stories in the media in the last year regarding lost laptops and therefore lost data. Nasstar Hosted Desktop means that no data is stored on local machines providing a more secure solution for your business data.

Simplicity. Although Nasstar Hosted Desktop is an innovate approach to delivering desktop computing the end user experience is very simple. The only requirements to be able to access your Nasstar Hosted Desktop - including all your applications and company data - are a web browser and an internet connection. Once logged in the user is faced with the familiar environment of a Microsoft Windows desktop and the business standard Microsoft Office applications including Word, Excel, Powerpoint and Outlook for email. So no re-training in new applications or a new environment is required.

Freedom. Nasstar Hosted Desktop enables you to access your desktop, applications and files from anywhere provided that you have an internet connection and web browser. This makes remote and flexible working strategies very simple. In a society concerned about the environment and the daily challenges of increased commuter congestion, many companies consider home working a more productive approach to growth and Nasstar's Hosted Desktop enables flexible working solutions to be implemented quickly and easily.

Scalability. Nasstar provides customers with a customer portal through which they can add and remove users very easily, making the solution extremely scalable.

In forming the view that it was the right time to focus sales on Nasstar Hosted Desktop, the Board took the view that whilst Hosted Exchange was a competitive market place, few providers have a hosted desktop solution. Our view was that cloud computing - delivering desktop plus applications and file storage in the internet cloud - is a huge growth market and it was better that we were pioneers and the only AIM pure play focussed on it than to sit back and wait for others to develop the market.

In terms of the number of subscribers live and being invoiced for Nasstar Hosted Desktop, sales increased by 500% during the period. In addition to these sales a number of contracts have been won that will ensure a substantial increase in the number of subscribers being invoiced during future periods.

The contracts we have been successful in winning include contracts for a significant number of users. These include the 4 year contract with Allied Healthcare Group for 800 users in over 100 office locations and a 3 year contract with Pinnacle Staffing Group plc for 160 users. The size of company adopting Hosted Desktop provides optimism for the future.

Despite the shift in focus to selling Nasstar Hosted Desktop, sales of Hosted Exchange email have still continued to grow with subscriber numbers increasing by 30% during the year.

Taking Nasstar Hosted Desktop to the wider market
 Having successfully launched Nasstar Hosted Desktop during the year through direct selling Nasstar proposes to increase market size by selling not only directly but also through a partner programme which will extend market reach by enabling third party service providers to sell Nasstar Hosted Desktop. We have been planning and developing the partner programme during the period, partly in response to interest and approaches from third parties interested in selling Nasstar Hosted Desktop as a pioneering product. The Board believe that Nasstar can obtain faster growth and a larger market share in a shorter space of time by enabling third party service providers to sell Nasstar Hosted Desktop.

Award winning Nasstar Hosted Desktop
Nasstar was pleased to win the CNET UK Networks Business Application of the Year 2008, this award, presented at the London Hilton hotel in September, is a significant recognition of the innovation that Nasstar has developed.

The Market
Nasstar Hosted Desktop is part of the 'Software as a Service' (SaaS) market which is growing at a fast pace. SaaS itself is part of a wider trend of internet growth, with TV, radio, telephone and music increasingly using the internet as a delivery platform. Worldwide revenues from SaaS are predicted to more than double between 2007 and 2011 to US$11.5 billion (Gartner market research). The growth is being driven by a number of factors including low cost high speed internet connectivity and the belief of software vendors that revenues in the medium to longer term will be greater if they deliver their software as a service as opposed to a traditional box product. Larger companies involved in the developing market include Google, Amazon and Microsoft. In September 2008 Microsoft announced their future vision of cloud computing, delivering software over the internet from their data centres. HP, Intel and Yahoo have also recently announced a plan to develop cloud computing.

The Board believes that Nasstar Hosted Desktop has an important place in this fast developing market. This is because in addition to the standard Microsoft applications Nasstar Hosted Desktop also enables customers to access their other applications such as Sage accounting or Salesforce CRM software. As a result Nasstar is not tied to one particular software vendor but instead provides the platform through which customers can use not only the core Microsoft applications but industry specific or bespoke applications supplied by third parties. At present there are other providers of hosted desktop but all appear to be small private companies and Nasstar has clearly established a strong reputation in the market place evidenced by the inbound interest from larger ISPs in the UK. Nasstar's proposal is to capture as large a part of the market as possible through its partner programme that will enable other ISPs and IT service companies to sell Nasstar Hosted Desktop rather than seeking to develop their own hosted desktop platform.

Operations
Nasstar has streamlined a number of operations this year to ensure even greater scalability. The web hosting contracts were disposed of in April. The logic of this was that hosting corporate web sites was no longer core business and there was a high risk that revenues from the remaining contracts would continue to decline. It therefore made sense to cash in on the contracts during the period and to use the proceeds for further working capital in developing the core business of Nasstar Hosted Desktop.

We have further developed the Customer Portal to enable customers to manage even more of their Hosted Exchange, BlackBerry and Nasstar Hosted Desktop services themselves. Such developments are welcomed by customers as they have more control over day to day maintenance. These developments also benefit Nasstar by reducing the volume of incoming support requests. We launched new help desk software in April. The software provides a knowledge base that is updated by Nasstar support staff when resolutions are found to new problems. Customers benefit from this as they can find an answer to their support query without the need to raise a support ticket. Our statistics have shown that the number of support tickets per customer have fallen as a result.

Employees and overheads
The number of employees has remained constant and we do not envisage any significant increase in employee numbers.

Outlook
The market is moving towards cloud computing at a fast pace and Nasstar is well placed in this market to increase its subscriber base through both direct sales and through its partner programme. The Board is confident about the Company's strategy and future growth prospects.

Charles Black
Chief Executive Officer